A couple of weeks ago I wrote about Edgar Bronfman, CEO of Warner Music Group, making negative public statements about free music streaming services. Now it seems the head of steam against Spotify, We7, et al is really building amongst industry execs, and possibly artists too.

The new news is came yesterday from market research outfit NPD Group. They have found that free on demand music streaming sites lead to a 13% decrease in paid downloads. In other words, not only do streaming services not generate much money directly for artists, they also reduce the amount musicians are getting from other channels. The labels also note that there have been lots of music streaming failures and no real successes – SpiralFrog and Ruckus closed their doors last year and Imeem sold out on the cheap to Myspace. Pandora has achieved profitability (if only for a single quarter) and is the closest thing to a success story, but crucially, they are a radio service, not an on-demand service.

All of this is pretty potent criticism, but it is worth remembering that the labels are making money from the free streaming services via their minimum guarantees, so there is at least some cash sloshing around. As we all know, the internet loves disintermediation, and as industry observers we shouldn’t assume that any of the existing players have a right be part of the value chain forever.

In a related development, US based on demand subscription service Mog.com has raised money from European venture fund Balderton Capital to launch their subscription service over here. Interestingly Mog are pitching themselves as a cheaper on-demand subscription service than Spotify, claiming they are able to be cheaper because they don’t need to subsidise a free ad-supported service. Mog’s US service launched in December and costs $5 per month, which compares with Spotify’s £9.99 a month in the UK.

To get theoretical for a second – the validity of Mog’s claim that it can undercut Spotify because it doesn’t have to subsidise an ad-supported service depends on the relative cost of customer acquisition for the two businesses. The beauty of free services is that they spread like wild fire by word of mouth and customer acquisition to the paid service can be low, depending on conversion rates – this is the basic logic behind the freemium business model. In the case of Spotify the main cost of acquiring paying subscribers is subsidising the free service, and that cost will swing hugely with the rate of conversion (if the conversion rate doubles from say 3% to 6% then the cost halves) – and it is this which will tell in the end. Mog will have more straightforward customer acquisition expenses and their efficiency in PR, buying media and converting site visitors to subscribers will be the difference between success and failure (assuming they have a decent service).

To wrap up, I think we are headed for a period where the music industry will experiment with subscription services and free services will become more limited. It is rumoured that Spotify’s launch in the US will be subscription only, for example. This structure has the advantage for existing industry players that it protects the existing industry structure. Whether it will be successful in getting more money into the hands of artists and reducing piracy only time will tell. Right now my personal view is that it is to tough to call – certainly existing music subscription services like Rhapsody haven’t made much headway, but I think these new services offer a better user experience. Maybe it will come down to price in the end – at $5 per month Mog is already heading towards the point where many will just sign up without thinking too much about it.

There has been a lot of hype about augmented reality in recent months and it was great last week to see Layar, a Dutch business in this space announce a $3.4m venture round from Prime and Sunstone, but many people have been questioning whether there is anything other than hype.

That might be about to change.

Check out the video below to check out Recognizr, an app from Swedish company The Astonishing Tribe, which uses facial recognition software to identify the person in the frame of your mobile phone camera and match them with profiles on social networking sites.

I love the idea of this app. One of the great things about being a VC is that I get to meet lots of interesting people, and one of the challenges is that try as I might I often struggle to put names to faces. Recognizr could be a huge help.

I can also see people using it to check out people they don’t yet know to figure out whether they want to speak with them or not, and if they do how to break the ice.

Unfortunately the app only recognises users who have opted in, so they have a chicken and egg problem to crack before getting to critical mass, but if they can get a decent distribution deal this just might fly. Also unfortunate is that the app is only available on Android and I haven’t been able to play with it yet. The Astonishing Tribe will also need to tread a careful line vis-a-vis privacy and personal security/stalkers if they are to succeed with Recognizr.

This kind of online-offline integration with social media could be big. Social interaction is generally more meaningful in the real world and I think there will be demand for tools which weave social networking into the fabric of our everyday lives.

Dutch app store analytics firm Distimo has some great info posted on ReadWriteWeb this morning. It is a long post and well worth the read if you are into this area.

For those of you looking for a quick takeaway, check out the two graphs below. What you see is that Apple is miles out in front of everybody else and also growing faster, both in terms if applications available, which I think is probably a reasonable proxy for ecosystem strength and sales. Apple’s dominance is almost monopolistic.

Android is making up ground, and Google will be encouraged by their strong Q4-09 OS market share data, but to say they are nowhere near Apple would nit be an understatement. The Distimo report highlights the difficulty of the Android payment system in comparison with Apple’s as a key concern for developers. As we move more towards lower price and free games with a complex array of in-app transactions the range and ease of payment options will become an important battleground between app stores as they compete for the hearts and minds of developers. I think they will increasingly be built into SDKs.

Also interesting is the absence of app stores beyond those of device manufacturers from this report, including those from network operators and startups like Getjar and Mobango.

There are some more titbits in this presentation that Distimo gave to the Mobile World Congress in Barcelona last week. Apparently there are now 1,600 developers with apps in multiple app stores and free app Tap Tap Revenge III did more revenue in January this year via in game transactions than FIFA 2010 which has a one off cost of $6.99.

I’m interested to read these stories not because I am ever likely to need to do something similar myself (I am nowhere near that technical) but because I need to be able to recognise a good engineer when I see one. That helps with figuring out whether we should invest in a company and in hiring senior techies into our existing portfolio companies.

Separating the code which deals with dynamic data from code which deals with static data offers possibilities for performance improvement, including using CDNs

For widget companies loading code onto a page asynchronously helps improve their customers page load times and is therefore a good thing

I will remember the Twitter post for its description of how they went about identifying the cause of a performance problem and having read it I will now experiment with asking CTOs to describe the last performance problem they encountered and how they dealt with it to see if it helps me form a view on how they would deal with problems they encounter in the future. Additionally, there are two takeaways, that they helpfully put at the end of the post:

First, always proceed from the general to the specific

And second, live by the data, but don’t trust it

When I hear stories from companies that are consistent with these concepts and ideas I will take it as a good sign, and when their are contradictions or absences I will want to understand why.

As a VC I have to cover a lot of ground. In fact, one of the reasons I enjoy this job is that it is one of the last bastions of the generalist. I need to be conversant in best practice across sales, marketing, engineering, finance, and general management as well as form a view on markets and opportunities for startups generally. Reading stories like these, and their equivalents in other areas (many of which I post on this blog) is one of the ways I try to stay on top of this challenge.

Now is a tough time to be in business as a startup. It’s a tough time for everyone pretty much, and internet entrepreneurs are no exception. Venture capital is tight, exits are difficult and the easy internet plays have all been done. These are statements I hear a lot, swiftly followed by the observation that to succeed these days you need to be much smarter and work harder than was the case a few years ago. I agree with most of that although I would add the poor macro climate as a significant contributor along with the maturing of the internet industries.

But my point here is not to be downbeat, but rather optimistic, because this difficult period will soon give way to another wave of innovation – the ever increasing pace of change will see to that.

Consider the chart below for a second. It is plotted logarithmically, which means that if the line were straight it would be telling us that the amount of compute power you get per $1,000 has been increasing at an exponential rate for over 100 years now, but given that it is curving up the increase is faster than exponential.

The dotted red lines show when that $1,000 will buy you more power than biological equivalents – an interest of Ray Kurzweil, the creator of this chart, who believes that when computers can match human brains we will rapidly approach a point he calls the singularity when the distinction between human and machine intelligence will cease to be important and even exist. An interesting idea, but one for another day.

I post this chart because it gives me confidence that the wave of innovation that was unleashed by the power of the internet will be followed soon by another wave. It could be smartphones (as Mary Meeker believes) or it might be consumer driven healthcare (as I’m starting to think), or maybe even robotics.

To bring this down to the level of nuts and bolts, and the original impetus for this post, in Ray Kurzweil’s newsletter email today I read about the following examples of innovations that might herald clusters of startup creation in the next few years:

Think of that – maybe at this time on one Friday night in 2020 you will be sitting at home controlling your fingernail sized iTV Nano with facial gestures as it streams high quality holographic images for your pleasure – while your house robot will be serving you a cold beer and making small talk.

There is plenty of space for multiple new startup waves between here and there – at least that is what I’m betting my career on.

Dharmesh Shah posted some great fundraising tips over on OnStartups last week. He should know a thing or two as well having raised $33m over three rounds for his latest company and as an angel investor in a number of other startups that have themselves raised venture capital.

All nine tips are great. As usual I’m going to pick out a couple that I like the best and embellish them a little.

1. Get the first round right: Dharmesh’s point is that any harsh terms you agree in the first round are likely to be a feature of subsequent rounds as well, so you will have to live with them a long time and shouldn’t accept them too readily. This is spot on – any VC coming into the Series B will look at the Series A terms and want the same benefits for their investment. Anything less feels unfair and also makes it look like the other VC is a better negotiator than you are.

I would add something else to the notion of getting the first round right – and that is the benefit of keeping it simple. Having simple and easy to understand documents is a huge timesaver. It makes it easy (or at least easier) for everyone to keep in their heads how things work, and saves time in debating nuances, resolving grey areas, going back to read documents and negotiation in the first place. And saving time usually means saving lawyer costs as well.

Worse, subsequent rounds will compound the problem as new investors want the same rights and privileges as earlier investors and the earlier ones don’t want to give up what they have.

Sometimes this moves beyond the time and money hassle of dealing with complexity to differing understanding of what was agreed and has been documented. This can stymie decision making. Fatal.

4. Know what market is: Dharmesh’s point is knowing what terms are standard in the market will protect you from unscrupulous VCs sneaking something past you – again this is a good one.

But be careful to make sure your view of ‘market’ is accurate. Unfortunately, there are a lot of people who readily give advice to startups that is not up to date. On one occasion I remember very clearly I found myself negotiating with a founder who on the basis of bad advice believed I was pushing for non-standard terms, which undermined the trust we had built in each other and put the deal at risk. Happily we got through it (although at the expense of some additional complexity) and the investment turned out to be a big success. Apologies for not being able to name names.

The best sources of advice are advisors who have successfully helped lots of startups raise rounds, entrepreneurs who have raised multiple rounds themselves, and friendly VCs.

8. Partner personalities matter: this is another big one for me – once the money is in three things about your VC fund will really count and one of those is how the individual partner will help you on a day to day basis. Will they be straightforward? do they really understand your business? share your vision? do you trust them? The other two are how the VC as a firm (i.e. all the partners) will be able to help you with the strength of their network and via association with their brand, and whether their fund has the capacity to support your company with sufficient further investment going forward.

We have all noticed how the pace of innovation is increasing – as an example, it is commonly noted that each new wave of communication services/devices gets widespread adoption much more quickly than the one before. Hotmail, Skype, social networks, Twitter, the iPhone, iPhone app usage – all of these are recent examples of products or services whose rapid rate of adoption has astonished onlookers.

Similarly, we have all noticed how the bar for customer service is rising all the time. Zappos, acquired for $1bn by Amazon last year is perhaps the best example here, their legendary 365 days free returns policy and ‘we will do anything for our customers’ attitude is an important part of their brand and driver of value fore their shareholders.

The reason I’m commenting on all this is that I’ve been astonished how quickly Google has reacted to the initial feedback on Buzz. As you will have read Google’s ‘Twitter killer’ service which brings social networking and email together was launched last week and was criticised in some quarters, if not many quarters, for insufficient thought on various privacy issues. Google listened, fed the message back to their developers and changed the product within a day, and then again two days later.

And the change is significant, cumulatively at least, replacing the default setting for public access to your implicit social network from opt-out to opt-in with an auto-suggest feature.

The saga is chronicled on Silicon Alley Insider, and if you are like me, reading that post will leave you impressed both by the speed at which Google marshalled resources to address this problem and the speed with which they were ready and able to change their thinking on opt-in versus opt-out for a key privacy setting. And they are not a small company either.

It is great to see the consumer being put first like this and the speed with which the quality of the products and services we are getting is rising all the time, including for $0 charge services like Google Buzz. This, of course, demands a higher standard of execution for startups (and all companies), but that is the price of the entry ticket to the game these days.